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Taxing controversy: Should hotels or booking engines be paying more in taxes?

And if either is forced to pay more, how and when might the added costs trickle down to travelers?

Over the last few years, municipalities and states around the country have periodically sued online travel agencies such as Expedia, Travelocity, and Orbitz for what amounts to underpaid taxes. Cities such as San Antonio, Philadelphia, Los Angeles, and Atlanta, and at least one state (Florida) have been fighting it out in court with the booking engines regarding how much the localities should be collecting in occupancy taxes.

It's a rather complicated issue. When a traveler books a room directly with a hotel, the traveler pays the full tax on the room rate. If a room is booked for $150, and the local tax is 10 percent, the traveler pays $15 in taxes, and the municipality where the hotel is located collects $15. But if that same traveler booked the same room for the same price through an online booking agency, the municipality doesn't get $15. Instead, the way things work now is that the municipality is being paid based not on how much the traveler pays, but on the amount of money the hotel receives for the room, after the online booking agency takes its cut. The hotel may only collect $120 for that room, and a 10 percent tax on that is $12. From the local authority's point of view, this situation means that it is losing out on $3 in tax revenues -- differentials that quickly add up to substantial money when we're talking about the thousands and thousands of hotel bookings made via Expedia and other online travel agencies (or OTAs).

The OTAs argue that all necessary taxes are being paid. Back to the hypothetical above: The municipality, the argument goes, isn't entitled to collect taxes on that $30 difference between the price paid by the traveler and the price received by the hotel. Assessing a hotel tax on that $30 would be unfair -- because Travelocity and the other OTAs are not hotels. The municipality would be assessing a hotel tax on something that's not a hotel, but instead is a service fee.

Complicated, right?

The OTAs, in the hopes of ending this tax battle -- in their favor, of course -- have launched a campaign and website, TravelersFirst.org, which asks travelers to back new legislation called the Internet Travel Tax Fairness Act (ITTFA). Making a plea to the heartland, and beckoning travelers to contact their representatives and request their support for the law, the website states:

While families across the country are struggling to make ends meet, let alone afford their summer vacation, the last thing politicians should be doing is adding yet another tax on travel. If they succeed, not only will your travel costs increase, but your local businesses could be hurt as well. When taxes increase, families, couples and business travelers travel less. And when tourists stay home they don't spend their hard earned dollars in your Main Street shops and businesses, creating jobs and supporting local economies.

Some of this seems a bit misleading. The municipalities would argue that there are no new taxes—that they're simply trying to enforce existing tax codes. The phrase "not only will your travel costs increase" seems like quite an assumption as well. How, exactly, will the traveler's costs increase? That's unclear. If the municipalities succeed in their quest for additional tax revenues, travelers won't be paying more as far as I can tell. Instead, they'd pay the same amount, with a little more going for taxes and a little less going to the OTAs. The traveler would, however, pay more if an OTA or the hotel decided to somehow add fees to make up for the revenues lost if the municipalities win the tax squabble. No one has suggested that this would occur (least of all the OTAs themselves), but it's unclear how a traveler's expenses would otherwise increase.

What's particularly interesting is that the OTAs and the hotels are not on the same side of this argument, as one might expect. According to a Wall Street Journal story about the ongoing tax battle, the American Hotel & Lodging Association is opposed to the ITTFA:

…the American Hotel & Lodging Association has come out against the legislation, asserting that the hotels could potentially be subject to a tax increase as governments try to replace the revenue lost as a result of the new rules.

"Hotels are worried that they will have to pay the extra tax because the city won't sit idly by and let that revenue go away," says Shawn McBurney, the association's senior vice president for governmental affairs.

What seems a bit sneaky, and what probably contributed to the OTAs getting into trouble, is that, from the traveler's perspective, it appears like he is already paying the full amount in taxes. Again, back to the above hypothetical: A traveler would pay a total of $165 ($150 plus $15) no matter if he booked with an OTA or through the hotel directly. On the surface, it appears as if the traveler is paying $15 in taxes, even though he's only paying $12 in taxes if he booked with an OTA.

What do you think? Would you prefer the cities or the OTAs to be collecting this extra money? (Answering "neither" is not an option, though that's the one we'd all prefer.) Is it fair to collect hotel taxes from a middleman that doesn't own or operate hotels? And what scenario do you think would result in an increase in travel costs?

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